So, What Exactly Will You "Win?"

As you know, the stock markets took a big hit this past week and emerging markets and currencies were blowing up left and right. I was reading a Zerohedge article regarding subprime home loans (and autos) where Jeff Gundlach is making a repeat call of Kyle Bass’s 2007 housing bubble/subprime implosion call. The article mentioned that 8 million homes are still stuck in the “shadow inventory” and how some homeowners have not even made one payment in 4 years. As I read down into the comments section there were questions and comments regarding this and the dropping equity markets…the question arose, “Will Kyle Bass go short again?” and “Will Jeff Gundlach put his money where his mouth is?”

I got to thinking about this and thought to myself “why.” Why would anyone who truly understands what is happening go “short” now? Yes of course, because many of these markets are going to implode and the “shorts” will “win.” But what exactly will they win? What if the markets do actually enter an “unscheduled holiday” because downside momentum picks up and it gets to a point where there are only offers and no bids…and they CAN’T open the markets? Will these shorts be jumping up and down singing “kumbayah we won” and partying like its 1999? I have just a few questions that might enter a few minds.

Questions like how will you be settled? If the other side of your trade is broke…who pays you? Most importantly, “what” do you win? Let me put this in perspective for you. Let’s go back in time to 1914 to 1923 Weimar Germany and assume that an astute trader shorted the stock of a bank, German bonds or even the currency itself (if that was even possible back then). Whoever put this trade on was a “winner,” a BIG winner! In some cases the asset actually went to zero and the short never needed to be covered because “zero is zero,” they “won” their bet 100%. But what did they win? They won Reichmarks, lots and lots of Reichmarks! But… there was a small problem with this “BIG win.” When all was said and done, it took something like 2.3 trillion Reichmarks to purchase just one ounce of gold so what were “lots and lots of Reichmarks worth?”

Do you see the problem here? Bass, Gundlach, Soros or any of the other great speculators may indeed “short the world” and win but they will be “paid” in dollars or other fiat. If (when) we do hyper inflate which mathematically looks to be assured then what is their “winnings” worth? Even if they do get paid by a counterparty that survives and has the ability to settle, what happens to these winnings when the dollar (or other fiat) is either grossly devalued or even replaced? In the case of Weimar Germany, how well off was the speculator who shorted 1 trillion (an enormous and unthinkable number in 1920) of German bonds and won 100% of the bet? Less than 1/2 ounce of gold…that’s how “well off!” If I’m not mistaken, 1 Reichmark equaled .25 cents in 1918 and an ounce of gold was $20 so it took 80 Reichmarks to purchase 1 ounce of gold before the hyperinflation began.

Am I saying that gold is going into the trillions of dollars? No of course not but I do want to caution you that it certainly could happen. Given the current federal debt and future entitlement obligations, couple this with the possibility (odds better than 50%?) that we no longer have a gold hoard in Ft. Knox, an overleveraged economy and financial system that has been driven, steered and buoyed for years by a derivatives market that is over $1 quadrillion …and top it off by a central bank with the ability to print dollars in unlimited quantities means that it is possible for the dollar to actually go to zero. Overly dramatic? Yes most probably but I wanted to illustrate the point that the conditions exist for the dollar to do what every single “pure” fiat currency has done throughout history…on a very grand scale…devalue at a minimum (until changed or altered) and actually die in the end game.

If you look at Zimbabwe, Venezuela or Argentina (the hyperinflation poster children) you will see that their stock markets have gone up dramatically, exponentially. Is this because business is so good? No, they are all in a depression where many goods even as simple as toilet paper are unavailable. Their stock markets have gone “up” only in terms of their local currencies…but down versus “REAL THINGS!” This is the crux of what you need to understand, it doesn’t matter if you “win” Zimbabwe dollars, Venezuelan bolivars, Argentine pesos or even U.S. dollars because they will/are devaluing to zero purchasing power.

I guess the best way to put this is “it doesn’t matter how much you win…it only matters ‘what’ you win!”

12 Comments

RF
on January 27, 2014 at 11:06 am

Bill,

How correct you are.

In the upcoming crash I just want to win enough to keep the electricity on and be able to eat.

I hope gold and silver will fill the bill.

Bill Holter
on January 27, 2014 at 11:31 am

if they don’t I don’t know what will other than owning a utility outright.

Rich
on January 27, 2014 at 12:14 pm

Bill,

Amen. They are all losers in the end. It’s that unequal weights and measures that we are all warned about.

Blessings

jane
on January 27, 2014 at 1:00 pm

Wouldn’t this apply to gold stocks too?

Bill Holter
on January 27, 2014 at 1:04 pm

I’m not really sure I understand the question. Mining companies’ product is “money”, they will be able to sell their product for whatever currency then exists…but since their product IS real money it will not be devalued like “dollar wins” or gains from closing out a position.

Marco
on January 27, 2014 at 2:00 pm

Hey Bill, the question that @Jane asked. Are you saying that if you own stocks in the mining company you will have to have preferred shares which is like owning a percentage of the product of that company? I think this may help to answer her question.

Bill Holter
on January 27, 2014 at 3:02 pm

no, you own a “percentage” of the product in the ground even with common shares. What I am alluding to is that mining companies produce “money” as their product.

Marco
on January 27, 2014 at 4:09 pm

Ok yeah that does make sense as we know gold and silver are money and the dollar is currency!

I love the things you write. I understand what you are saying for the most part but a person who shorts a stock gets the proceeds “upfront” in todays dollars and if that stock goes to zero they dont have to pay much if anything to reimburse the shares that the person borrowed and then sold into the market. The short seller was paid right away. Say I “knew” that Herbalife was going to go to zero, I could short it now take those proceeds buy oz’s of gold and silver right away with that money. When Herbalife goes to .001 on the pink sheets I can buy it back and keep the gold and silver for myself. I don’t know just my thought.

Bill Holter
on January 27, 2014 at 10:08 pm

yes correct, but the second action of purchasing the metal would have to be undertaken. The chances are that short sellers will take the cash and re short somewhere else or be long somewhere else in the stock market. As I said, if the asset goes to zero they won’t even be required to cover.

Bill,
I like your analysis. I recently asked the question in my blog, Are MiLords Stupid? It seems you are dancing around the same question. Here’s a thought.

We need to differentiate between MiLords (the .1%) and the merely rich, the 1%, the foot soldiers of the Oligarchy. The cannon fodder of the ubber rich. As the end game approaches more and more desperate measures are being undertaken and the 1% are piling up cash like there is no tomorrow. I wonder if MiLords do have an exit plan? And delaying tactics, though they appear suicidal, are just buying time to set up the end game.

It would appear that a reset of some kind is inevitable. So controlling the board in some way, (nuclear? boycott? grease on the slide of a China bank collapse?), could be the name of the game. If behooves us to stop wondering if they are really stupid, and concentrate on being smart. IT IS ALL ABOUT THE RESET!

So how do we get the 5% to understand the game, reject the lie and stop participating in the gladiator contests pitting Republicans against Democrats? How do we expose the Oligarchs who are wearing no clothes? If we can’t get even 5% to understand the endgame that is coming, we will find ourselves in a new system that is still under the control of the same players. And China will get all the blame. And we will be surrounded by idiots who believe the lie, and will be calling for Obama’s head. And we will be wishing we could speak Chinese.

Sure some of us will have a stash of silver and that is better than nothing. But if we truly want to live and not just survive, we need to find a way to get out the message. That is why it is vital to name the .1%. If we don’t like MiLords, then we need to come up with something. We need terminology that transcends politics.

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